Perpetual Futures - Deep Dive
Perpetual futures are financial instruments, specifically derivatives, that allow traders to speculate on the future price of an asset. Derivatives in DeFi, or synthetic assets, allow for speculation on the price of an underlying asset without directly owning the asset itself, which opens the way to greater degrees of leverage and is often much more liquid than spot markets.
When compared to traditional futures, perpetual futures have one key difference, which is that it does not have an expiration date and can be held indefinitely.
Normally, a perpetual futures contract will have two counterparties, one long and one short, where the two counterparties pay each other on an ongoing basis depending on whether the market price of the underlying asset is higher or lower than the contract price.
Because Horizon Futures is a decentralized perpetual futures platform that leverages Horizon Protocol’s staked liquidity as the counterparty of all open positions, the stakers are the ones who either pay or receive the ongoing funding payments when the contract price is higher or lower than the market price.
To incentivize these markets towards a balanced skew between longs and shorts, also known as delta neutrality, Horizon Futures implements a 2-layer approach rather than relying on a single mechanism. The 2 mechanisms are:
In the following article, we explain the importance of maintaining delta neutrality in perpetual futures and provide details and examples of the two mechanisms implemented to maintain delta neutrality.